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In the United States, the assets of private charitable foundations have increased 15-fold in just over 35 years. Since the start of the pandemic alone, they have soared by nearly 50 per cent.

On a global scale, private charities benefit from increasingly generous tax arrangements, a lack of transparency and lax regulations. As a result, billions of dollars are multiplying tax-free, depriving governments of crucial resources to meet urgent needs. This charitable farce, also present in Canada, has been going on for far too long.

A tax deal that doesn’t work

Foundations take on different forms and names in different countries, but their tax regime generally boils down to the same three components: a tax gift for the founder, a tax vacation for the foundation, and a charitable redistribution obligation, often minimal, for the foundation.

In Canada, where the tax regime for foundations is one of the most generous in the world, donations from individuals can benefit from a tax credit of up to 53 per cent of the value of the donation, the foundation is tax-exempt and only has to devote five per cent of the value of its assets to charitable purposes each year.

Public finances are severely penalized by this system, as it takes nearly 35 years for the value of the charitable spending carried out by foundations to exceed the value of the tax benefits enjoyed by the foundation and its founder. For donations of publicly traded securities, this period extends to around 100 years, because in addition to the donation tax deduction or credit, the donor also benefits from a capital gains tax exemption.

Donations of publicly traded securities are particularly common in Canada. Since 2020, they have accounted for 12 per cent of donations, totalling over $6 billion, turning the “tax deal” of charity into a real trap for public finances. In contrast, donations of ecologically sensitive land and cultural property, which also benefit from enhanced tax advantages, remain far less significant, accounting for less than one per cent of total donations.

Influencing the use of public funds

Canada is not an isolated case. In the United States, private foundations, which benefit from a similar tax regime, have accumulated assets totaling US$1.5 trillion as of 2024. To put this figure in perspective, $1.5 trillion could finance the construction of social housing for six million families at a cost of $250,000 per unit, or fund 60 million years of university education at $25,000 per year. By comparison, tax havens currently host between US$2.9 and US$3.4 trillion (or 10 to 12 per cent of US GDP).

If tax havens are worrying, the US$1.5 trillion trapped in private foundations could be even worse. In addition to offering tax advantages comparable to, or even superior to, those of tax havens, the current tax regime allows private foundations and their founders to exercise disproportionate control over social issues that should be the responsibility of the state. In the end, these foundations and their founders benefit from low or non-existent taxation, while appropriating power that should be in the public domain.

In the G7 countries, foundation wealth totals around US$2 trillion, a figure that could rise to US$3 trillion worldwide (my estimates). Between themselves, the world’s 10 richest private charitable foundations hold a combined wealth of almost US$500 billion. The growing popularity of foundations seems far from over. In its 2020 Tax and Philanthropy report, the Organisation for Economic Co-operation and Development (OECD) highlighted “the increasing prevalence of large philanthropic foundations has placed greater focus on the degree of influence of large donors on the use of taxpayer funds.”

Quest for perpetuity

In theory, citizens might be delighted to see this fortune earmarked for charity. In reality, they do not benefit from it. For the most part, these trillions are held in perpetuity, in accordance with the founders’ wishes. What really funds charitable work is the return generated by this fortune, leaving the capital untouched.

In Canada, the Chagnon Foundation illustrates this dynamic: it began with a donation of $1.4 billion, and its assets reached $2.1 billion as of December 31, 2023. In 2020, the first year of the pandemic, it allocated only three per cent of its capital and less than 50 per cent of its income to charitable purposes. The situation is even more worrying with the MasterCard Foundation, launched in 2005 and today endowed with assets of almost US$42 billion. Thanks to a special arrangement with the Canada Revenue Agency, this foundation benefited from a 15-year “charitable pause,” thus delaying its redistribution obligations.

Perpetuity is an ideal as old as the world itself. As far back as ancient Egypt, where the idea of survival after death was reflected in the construction of temples for the deceased, financial structures were put in place to ensure that these buildings would be preserved forever. Foundations have evolved over the millennia, but the goal mostly remains the same: the pursuit of perpetuity.

Reform the taxation of foundations to enable them to play their role

At a time of growing inequality, charity is more vital than ever, and requires effective taxation. However, one of the main obstacles to reforming the tax regime for foundations is that they are generally popular with the public. Yet their relationship with citizens and governments has not always been harmonious.

In the 1960s, the US government set up the Patman Commission, denouncing the lack of transparency and abuse of foundations. Strict rules were introduced, requiring foundations to devote at least six per cent of their endowment annually to charitable purposes, a percentage reduced to five per cent in 1976. Reinstating the obligation to distribute more than five per cent of a foundation’s value would stimulate more rapid and efficient use of funds.

Tax incentives for founders should also be gradually reduced. The introduction of a form of taxation on foundation returns, existing in several countries including the United States, could also be considered. However, the American rate of 1.39 per cent is still insufficient to have a significant impact on the effectiveness of the tax system.

These adjustments are achievable, especially as foundations can hardly threaten to exile themselves in the face of tighter tax rules. If a relocation caused the charity to lose its residency in Canada, this could result in the revocation of its registration, followed by the distribution of assets to qualified recipients (foreign organizations are excluded).

Private foundations, by virtue of the inordinate size of their assets and the magnitude of the tax advantages they and their founders enjoy, have become a true anomaly in the global tax system. As long as governments continue to allow these structures to operate within this inefficient tax framework, the gap between philanthropists and the real needs of society will continue to widen.

Only a radical reform of foundation taxation can ensure that private wealth is finally put to work for public causes, rather than reinforcing a system of privileges disguised as charity.

Thanks to Professor Abderrahmane Djaballah for reviewing the present value calculations.